Export Control News & Alerts

The Export Control Update Newsletter
February 2007

CONTENTS

1. BIS Considers Adding Country Group C for “Destinations of Diversion” Concern
2. DDTC Managing Director Says Exporters Still Submitting Many “Low Quality” Applications
3. Henry L. Lavery, III and SAI Get ITAR Debarment at Least until December 2007
4. ITT May Settle Charges of Shipping Night-Vision Technology to China for up to $100 Million
5. DDTC Posts Frequently Asked Questions and Answers Related to D-Trade
6. ITAR Continues to Cause Problems for Some Canadians with ITAR 126 Dual Citizenship — Canadian Citizens May Seek Relief via Canadian Legal System
7. Libya Gets Slightly Better Treatment under the ITAR
8. BIS Update on Voluntary Self Disclosures
9. More Small EAR Fines
10. Response Team Email Problems Resolved
11. Export to EAR Entity List Party Nets $19,000 Fine
12. Venezuela Officially Added to ITAR 126.1 Prohibited Countries List
13. Failure to File SEDs/AES Nets $450,000 Penalty
14. New Electronic Code of Federal Regulations (e-CFR) Site

1. BIS Considers Adding Country Group C for “Destinations of Diversion” Concern

In an effort to scare the governments of countries that are major transshipment points to US embargoed countries (or as Commerce would say, ‘in order to strengthen the trade and export compliance systems of countries that are hubs for transshipments), the Commerce Department’s Bureau of Industry and Security (“BIS”) published a notice of proposed rule making in which it stated it is considering adding a “Country Group C” for countries of particular diversion concern. Inclusion in this new group would be based on several criteria including, but not limited to the following:

• transit and transshipment volume,
• inadequate export/reexport controls,
• demonstrated inability to control diversion activities in this destination,
• having a government not directly involved in diversion activities, and
• having a government unwilling or unable to cooperate with the US in interdiction efforts.

The export controls on Country Group C would be more stringent than they are currently. The result could be the requirement of more license applications, more stringent review policies, fewer approvals and delayed authorizations. All of these would be necessary to decrease the diversion risks.

The Commerce Department says the goal of this addition would be to further the national security interests of the United States and to address the threat to national security caused by the illicit transshipment, reexport and diversion in international trade of EAR-regulated items. Diversion of such regulated items could significantly undermine US counter-proliferation efforts as well as increase the capabilities of state sponsors of terrorism.

— John Black

2. DDTC Managing Director Says Exporters Still Submitting Many “Low Quality” Applications

The Managing Director of the Department of State’s DDTC reported that DDTC is still receiving a steady stream of low-quality applications. About 2 out of 10 applications that are received are considered inadequate and are being returned without corrections as is the current policy of the DDTC. Examples of such applications include the following:

1. Country name on application doesn’t match country on supporting documentation
2. No Purchase Order attached to license application
3. Values on application and purchase order are not consistent
4. TAA requests to change the terms of other companies’ TAAs
5. Lack of an original empowered official certification letter with submission of agreements and agreement amendments
6. Proposing to provide defense services to a foreign country without TAA
7. Lack of required Part 130 statement with submission of agreements and agreement amendments
8. Continually making late applications and evoking national security reasons for immediate case adjudication without adequate justification
9. Submitting multiple TAAs and licenses when only one is necessary
10. Poorly documented commodity jurisdiction requests
11. Incomplete or deficient registration requests

Exporters are encouraged to take more care in these matters when submitting applications.

Full story on DDTC’s site

— Jill Kincaid

3. Henry L. Lavery, III and SAI Get ITAR Debarment at Least until December 2007

The Directorate for Defense Trade Controls at the State Department has debarred Security Assistance International, Inc. (SAI) and its president, Henry L. Lavery III from participating directly or indirectly in any activity regulated under the ITAR until December 12, 2007. DDTC also fined SAI $75,000. These penalties are based on a settlement agreement between DDTC and SAI. Because a significant part of the company’s business activities involve providing export compliance consulting services, this is a particularly stiff penalty as it may prohibit SAI from assisting companies with ITAR related compliance issues, not to mention the fact that this second settlement does nothing to help SAI’s reputation.

The State Department discovered the alleged violations when it was conducting a review SAI’s compliance program — the review was being conducted pursuant to a 1999 settlement agreement between State and the company for previous violations. According to State, SAI had not satisfactorily corrected many of the practices which had resulted in the prior violations. The previous serious violations had included charges such as falsifying applicant signatures, obtaining licenses for unregistered firms and failing to maintain adequate records.

DDTC’s charging letter claimed that SAI omitted material facts on license applications, aided and abetted violations, failed to keep required records, and failed to comply with license provisos. More specifically, according to the charging letter, the specific incidents that led to the charging letter are:

• SAI failed to disclose it was applying for a temporary export license in the name of SAI for use by a company whose DDTC registration had lapsed.
• SAI failed to keep good records related to the 11 ITAR authorizations received between January 1, 2003 and June 1, 2005.
• SAI failed to comply with the proviso on a DSP-61 that required that it submit certain documents to DDTC.

The debarment will last until at least December 2007, at which time DDTC will decide whether to lift the debarment based on the company’s full compliance with the December 2006 Consent Agreement and, of course, based on the State Department being generally satisfied with the company.

— John Black and Jill Kincaid

4. ITT May Settle Charges of Shipping Night-Vision Technology to China for up to $100 Million

Persons familiar with the case say that ITT may settle charges of shipping night-vision technology to China against US regulations for as much as $100 million. The sources have asked not to be identified because negotiations with the government are continuing and the settlement amounts may still change.

Defense contractor, ITT, is the world’s largest manufacturer of night-vision goggles. The Chinese government has been aggressively pursuing trying to obtain “Generation-3 night-vision technology” so that they can develop ways to counteract it. China is well-know for it’s attempts to collect military-related technologies.

If these charges are settled, it would be the 2nd settlement in as many years for ITT for export control violations. In 2004 they paid $8 million and agreed to improve their compliance programs to ensure that sensitive technology would fall into the wrong hands.

It is suspected that the technology in question was transferred to China between 2001 and 2005 by a Singapore-based subcontractor according to the sources. ITT Chief Executive Officer, Steven Loranger, said in a statement in December that his company was committed to a “world-class compliance culture” and hoped to have the matter resolved with the government by early in 2007.

Sources: The Federal Register, Vol. 72, No. 25; Bloomberg.com: February 2, 2007, authors: Robert Schmidt & Tony Capaccio

Full story on Bloomberg.com

— Jill Kincaid

5. DDTC Posts Frequently Asked Questions and Answers Related to D-Trade

The Directorate of Defense Trade Controls has posted a document with frequently asked questions and answers about D-Trade on its website. It is a good first place to check for solutions to your D-Trade problems.

DDTC’s “Frequently Asked Questions” (Word document)

— Jill Kincaid

6. ITAR Continues to Cause Problems for Some Canadians with ITAR 126.1 Dual Citizenship—Canadian Citizens May Seek Relief via Canadian Legal System

According to media reports, the fallout continues from conflict between tight United States ITAR requirements and Canadian defense manufacturers. US regulations prohibit Canadian citizens who have dual citizenship in a country listed in ITAR 126.1 from working on US defense projects. There are currently 19 countries whose citizens are banned from this type of work including China, Cuba, Lebanon, Syria, North Korea, Belarus, Afghanistan and Rwanda. Recently Venezuela was added to this list, which may have contributed to the termination of an employee at Montreal’s Bell Helicopter facility.

Bell Helicopter is currently working on an $849 million contract for the US Military and has had to reassign 24 employees to stay in compliance with the US regulations on who can work on their defense projects.

Jaime Vargas, a Canadian citizen with dual citizenship in Venezuela, had only worked at Bell Helicopter for several weeks when he was unexpectedly terminated. There are conflicting stories from Mr. Vargas and Bell representatives on the quality of work performed by the employee. Though Bell claims that he had performed poorly, Mr. Vargas states that he had had nothing but positive reviews and had recently been congratulated by his supervisor on the high quality of his work.

The Canadian Centre for Research-Action on Race Relations says that it will be filing a civil suit on Mr. Vargas’ behalf stating that they believe he was terminated solely based on his connection with Venezuela. They will ask for $110,000 in compensation for Mr. Vargas. The suit will be based on allegations that the termination violated Canadian Human Rights laws.

John Black’s Note: I hope Mr. Vargas wins the suit. I seriously doubt that DDTC will want to revise the ITAR if that happens, but I love it when DDTC digs in its heels and refuses to bend its policies to take into account issues outside of its own control. I look forward to the eloquent statement of the DDTC position, “We don’t care if you win a law suit, we don’t care if the ITAR causes good Canadian companies to violation Canadian laws, we aren’t changing the ITAR.”

Source: “Canoe Network Money” 2/6/2007

Full story on Canoe Network

— John Black

7. Libya Gets Slightly Better Treatment under the ITAR

On February 7, 2007, the Department of State amended the ITAR regarding its trade policy with Libya. In May of 2006, the US rescinded Libya’s designation as a state sponsor of terrorism. As a result of this, Libya has been removed from sections 126.1(a) and 126.1(d) of the ITAR and added to 126.1(k). This specifies the following:

“It is the policy of the United States to deny licenses, other approvals, exports or imports of defense articles and defense services destined for or originating in Libya except, on a case-by-case basis, for:

1. Non-lethal defense articles and defense services,
2. Non-lethal safety-of-use defense articles (e.g., cartridge actuated devices, propellant actuated devices and technical manuals for military aircraft for purposes of enhancing the safety of the aircrew) as spare parts for lethal end-items.”

As Libya is still proscribed in 126.1, exemptions other than 123.17 do not apply with respect to articles originating in or for export to Libya. Also, in terms of proposed sales, the requirements of 126.1 still apply.

Federal Register notice

— Jill Kincaid

8. BIS Update on Voluntary Self Disclosures

It appears that the results of the voluntary disclosure by EPMedSystems, settled in November 2006, have created some increased apprehensions about Voluntary Self Disclosures (VSD) in the export community. For the first time ever, a voluntary disclosure has resulted in charges against the disclosing company of making false statements in connection with the VSD, and consequently, a penalty of 96% of the maximum.

Various export-related internet blogs have used this case as a rationale to encourage companies to think long and hard before filing a VSD with the BIS so as not to risk being charge with misrepresentations.

In a December, 2006 article published in The Export Practitioner, Wendy Wysong, Deputy Assistant Secretary of Commerce for Export Enforcement for BIS, attempts to counter that mindset with the statistics on actual VSDs and their resolutions. She notes that in the vast majority of VSDs (95%) resolved in the past 3 years there were no administrative enforcement penalties such as fines or denials of export privileges. She also notes that in the cases which did result in penalties, they were almost always less that 35% of the maximum allowable penalty.

In the instance of the EPMedSystems VSD, Ms. Wysong makes the case that the VSD is in all likelihood reason that the company is still in operation. With a charging letter listing 35 separate violations, some as serious as conspiracy, evasion and exporting/reexporting with knowledge, EPMedSystems could have easily been facing criminal or denial penalties, effectively putting them out of business.

In his commentary on Ms. Wysong’s article published in The Bugle, R. Clifton Burns notes that included in the criteria for assessing a violating company’s penalties is considering the possibility of recurrence of the violation. Factors relating to this include the “continued employment of culpable employees”. For the first time, BIS seems to be suggesting that employees involved in a civil violation be fired without regard to more appropriate disciplinary action. Will this lead to the automatic termination of employees with involvement in violations regardless of the circumstances? Mr. Burns concludes by saying that “the sucking sound you are now hearing is the sound of hundreds of export compliance officers looking for new jobs”. Let’s hope that that won’t be the case.

— Jill Kincaid

9. More Small EAR Fines

A. N. Deringer of Saint Albans, Vermont, agreed to settle charges of 3 violations of the EAR relating to the export of copy toner to Iran without the authorization of Treasury’s Office of Foreign Asset Controls. The charges listed are Causing, Aiding or Abetting a violation; Acting with knowledge of a violation; and Misrepresentation and Concealment of Facts. A. N. Deringer was the freight forwarder for the export. The three charges were settled for $21,120 civil penalty fine.

Top Line Express, another freight forwarder from Jamaica, NY, agreed to settle one charge of Aiding and Abetting an Unlicensed Export to a Listed Entity relating to exports of fuel tank sealants to India. Top Line was forwarding on behalf of Interturbine Logistiks to Bharat Dynamics, Ltd., the listed entity. The charge was settled for a $6,500 civil penalty fine.

Interturbine Logistiks of Grand Prairie, Texas, settled charges of 4 violations of the EAR for $30,800. The charges related to the unlicensed export of fuel tanks and other aircraft parts to India and to a listed entity for use on an Iranian aircraft.

View the complete charging and settlement letters:

A.N. Deringer (pdf)

Top Line Express (pdf)

Interturbine Logistiks (pdf)

— Jill Kincaid

10. Response Team Email Problems Resolved

According to a PM/DDTC Response Team member, email difficulties that the Response Team were experiencing in late February have been resolved. During that time period some users were receiving “undeliverable” messages when attempting to communicate with the response team though their e-mail or though the link below on their web site.

If you continue to experience problems you can contact the Response Team by phone at (202) 663-1282.

www.pmddtc.state.gov

— Jill Kincaid

11. Export to EAR Entity List Party Nets $19,000 Fine

Magnetic Shield Corporation of Bensenville, IL has agreed to settle 3 charges of violations of the EAR. The charges relate to the export and attempted export of magnetic shielding materials to the Indira Gandhi Centre for Atomic Research in India, which is on the Entity List of the Department of Commerce. The charges are being settled with a civil penalty of $19,000.

John Black’s Note: Well, if the price for dealing with a party on the Entity List is only $19,000, the fine itself is not much of a deterrent. Of course, the company probably spent a good deal more than that on legal fees, and, of course, everybody wants to be compliant.

— Jill Kincaid

12. Venezuela Officially Added to ITAR 126.1 Prohibited Countries List

In the February 7, 2007’s Federal Register, the State Department amended section 126.1 of the ITAR to include Venezuela in the list of countries not cooperating fully with anti-terrorism efforts. This just makes the policy announced last year officially a part of ITAR 126.1.

The Secretary of State determined that Venezuela, along with Cuba, Iran, North Korea and Syria, would be placed on the list beginning October 1, 2006. The AECA prohibits the sale or licensing of defense articles and services to those countries on the list for the term of one fiscal year beginning October 1, 2006. Additionally, the State Department issued a policy of denial of the export or transfer of defense articles to and revocation of existing authorizations for Venezuela on August 17, 2006.

Federal Register notice

— Jill Kincaid

13. Failure to File SEDs/AES Nets $450,000 Penalty

OK, so you forgot to do your AES filing for that shipment to Aruba, no big deal, right?

According to the Commerce Department, over a period of almost 8 months, Aviacsa Airlines of Houston, Texas exported No License Required aircraft parts without filing the required SEDs/AES on 75 different occasions. The shipments ranged in value from $2550 to approximately $22,000. Consequently, Aviacsa agreed to pay a fine of $450,000—half of the fine is suspended for one year and will be waived if Aviacsa doesn’t get caught with any violations during the one year period.

No doubt, Aviacsa’s lawyers claimed that they got a good deal for their client, who could have faced fines of $875,000, or even more if Commerce had decided to double count violations as it often does.

Bottom Line Compliance Lesson: Failure to file SEDs/AES can lead to problems. I am not saying one mistake will get you in big trouble, but we now know what can happen if you fail to file 75 times. Use this story to scare your company into doing a better job with its SED/AES filing.

— John Black

14. Electronic Code of Federal Regulations (e-CFR) Site

This is a new GPO beta site for integrating Federal Register notices almost immediately into the full body of the CFR.

e-CFR site

— Scott Gearity

 

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